ComfortDelGro Corporation - Operationally A Weak Quarter
- CD’s 1Q17 revenue and EBIT were slightly below estimates, as overseas operations reported lower-than-expected earnings. However, net profit was in line, aided by a special dividend from Cabcharge Australia.
- As expected, its Singapore taxi fleet size and hire-out rate declined QoQ, while its public transport unit saw strong revenue growth.
- We like CD for its strong FCF generation, the ability to undertake inorganic growth aided by a net cash balance sheet, and its gradual rise in dividend payout ratio to 80% (45.4% yields).
- Maintain BUY, with a SGD3.00 TP (12% upside).
Taxi and automotive engineering drags EBIT lower.
- ComfortDelGro’s (CD) taxi EBIT (-12.2% YoY) and automotive engineering EBIT (-20.6% YoY) witnessed the sharpest decline in 1Q17.
- The decline in taxi EBIT was mostly driven by the weakness in its overseas taxi operations (especially China), and lower EBIT for automotive engineering was due to higher diesel selling prices and a lower volume of sales to taxi drivers amidst a smaller taxi fleet size.
Competition remains elevated in taxi industry.
- Taxi revenue fell SGD19m YoY in 1Q17, Of this, the decline of SGD10m was from overseas operations, while its Singapore unit’s revenue dropped SGD9m YoY. Its Singapore taxi fleet shrunk to 16,000 units, from c.16,800 as at end 2016.
- While the idle rate has increased to 3.5% from 2016’s average of 1.4% and is above our estimate of 2% for 2017, we keep our 2017 earnings unchanged. This is as we expect the introduction of new regulations for private hire car drivers and vehicles in 2H17 to put brakes on the unchecked growth in Uber and Grab’s operations and fleet sizes.
Rail to see gradual improvement.
- The Downtown Line (DTL) registered strong ridership growth of 19% YoY in 1Q17. While the North East Line remains profitable, the DTL continued to report losses as the combined ridership of DTL1 and DTL2 is still below expectations.
- CD remains confident of DTL3’s opening later this year and is optimistic of achieving strong ridership growth, as the line will connect some of the most densely populated parts of Singapore. Management believes that the DTL could start reporting profit once the overall average daily ridership reaches close to 500,000 (currently 245,000).
Guidance remains unchanged.
- CD has maintained its revenue guidance from 4Q16. Its Singapore and Australia bus businesses are expected to witness an increase in revenue.
- Amidst the expectation of maintaining a rational taxi fleet size in Singapore, management may not look to aggressively add more taxis to its fleet, and maintained its guidance of SGD250-300m of capex.
- We like CD for its ability to deliver a 7.5% profit CAGR during 2016-2019, in line with its 10-year and 5-year profit CAGRs of 7.4% and 6.1% respectively.
- Its high FCF yield of 7-8.3% should support dividends.
- Management remains on the lookout for inorganic growth opportunities, given its strong net cash balance sheet.
- Winning the tender for the Thomson East Coast Line would be positive for CD’s earnings from 2019 onwards.